Energy producers - June 5

In Oil Producers' Brave New World, a Key Word Is 'Partnerships'Knowledge@Wharton (Wharton Business School's Business Journal) via Petroleumwrold In Venezuela, President Hugo Chavez is threatening to snatch control of several major projects from American and European firms. In Russia, the government recently strong-armed Royal Dutch Shell into relinquishing control of a large field called Sakhalin II. In developed countries, home to the six so-called "supermajor" oil producers, politicians have debated imposing windfall profits taxes.

Across the oil-producing world, governments are responding to higher petroleum prices by imposing new taxes on oil companies and forcing the renegotiation of contracts giving foreign firms access to critical reserves.

According to speakers at the 2007 Wharton Economic Summit, such developments augur a new age for the oil business. The time is over when major oil companies can dictate the terms of development deals to host countries. About four-fifths of the world's reserves are already controlled by state-owned firms, and political strongmen like Chavez and Russia's Vladimir Putin seem intent on tightening their hold on their countries' oil wealth. Russia has the world's largest oil reserves, after Saudi Arabia.

"The ability of major oil companies to exert their muscle has diminished," said David Fleischer, a principal with Chickasaw Capital Management in Memphis, Tenn. "They still bring a lot of technology and expertise, but that's less important in today's world. Countries like Venezuela don't care as much as they should about maximizing their revenues. They care about control of their resources."

Yet the situation isn't as dire as the headlines can make it seem, said Mohammad Azam Ali, chief executive of Dubai-based Orient & Gulf DMCC. Oftentimes, politicians' threats are just posturing intended to appeal to local people, and not genuine declarations of intent. "The governments, most of them anyway, are aware of what they need the companies for. There are many examples of major U.S. oil companies doing very well in the Middle East despite problems between the U.S. government and various Middle Eastern governments."

...Fleischer counseled humility over legal machismo. "The humble approach -- letting [state oil companies] own the reserves and you bringing the capability and technology -- makes more sense," he said. That way, no potential partner is alienated. And sooner or later, most oil-producing nations will have to call for the big firms' help

...A wild card in these sorts of strategy discussions is the growing role of China's state-owned oil producers, which are expanding aggressively. Though not as technologically advanced or experienced as Western firms, they have the financial backing of their government and might appeal politically to America-bashers like Chavez.

Africa's Oil DreamsAlex Perry, Time Magazine ...SÃ£o Tomé and Principe is part of a string of countries on the Gulf of Guinea, the right angle in Africa's west coast, which is the oil industry's new El Dorado. By some estimates, Africa holds 10% of the world's reserves, but that figure belies the importance West Africa has already achieved as a source of energy. According to Poisoned Wells, a new book on African oil by Nicholas Shaxson, an associate fellow with international affairs institute Chatham House in London, the U.S. imported more oil from Africa than from the Middle East in 2005, and more from the Gulf of Guinea than from Saudi Arabia and Kuwait combined. Nigeria, the giant of the region, supplies 10-12% of U.S. oil imports.

Indeed, says Daniel Yergin, chairman of Cambridge Energy Research Associates, West Africa is "only going to get hotter. It has the location and the resources; the technology is now there to develop them; and companies from all over the world want to be in on the action." Rising demand from India and China and worries over instability in the Middle East have fueled higher oil prices, and those in turn have precipitated a new scramble for energy - oil rigs worldwide now have to be rented a year in advance.

There are several reasons why the Gulf of Guinea is a key focus of this rush. African oil is high quality, with a low sulfur content that requires little refining to get it to the pump. The Gulf is relatively close to the U.S., cutting shipping costs to the world's biggest oil consumer, and most of the reserves are out to sea - which means there's no need to construct pipelines through different nations to get the stuff to market.

Equally important: unlike some other oil-rich countries, African nations welcome foreign companies to their oil fields, as there are no indigenous African oil majors. In his 2007 book Untapped: The Scramble for Africa's Oil, John Ghazvinian, a visiting fellow at the University of Pennsylvania, explains the euphoria like this: "African oil is cheaper, safer and more accessible, and there seems to be more of it every day ... No one really knows just how much oil might be there, since no one's ever really bothered to check." (31 May 2007)Long article.

The $6 billion pipeline project, referred to as Nabucco, is expected to run through Turkey, Bulgaria, Romania, Hungary and Austria. Construction is scheduled to begin in 2008, so that the pipeline could go on stream in 2011.

The European Union expects the project to diversify its supply routes away from Russia and boost European energy security.

"We will definitely implement the Nabucco project providing for the export of natural gas from the Caspian Sea basin to Europe across Turkey. Nothing will affect its implementation," Turkish Energy and Natural Resources Minister Hilmi Guler told an international oil and gas international congress in Ankara.

The Nabucco gas pipeline project is seen as a rival to the gas pipeline deal recently clinched by Russia and Central Asian states.

Russia's President Vladimir Putin and the leaders of Turkmenistan and Kazakhstan, which are the region's major gas producers, agreed May 12 to build a pipeline along the Caspian Sea coast to pump billions of cubic meters of natural gas from Turkmenistan to Kazakhstan into Russia's network of pipelines running to Europe. (29 May 2007)

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